The Blockchain (R)evolution and the Role of Antitrust

This piece, availablehere, explores a number of (EU) antitrust issues that may arise in the context of blockchains.

It is structured as follows:

The paper starts by explaining what the blockchain is and what it can do.

The blockchain is a technology that uses a software protocol based on cryptography to keep exchanges secure. It allows anybody in the chain to see all transactions on it, removes the need for trusted intermediaries keeping a transaction ledger, and ensures that the transaction ledger is immutable and very hard to tamper with.

Blockchains can be divided into open and permissioned networks. Open (i.e. public) networks are accessible to anyone, so that the database is truly public information. This is the case of the blockchains underlying Bitcoin and Ethereum.

Permissioned (i.e. private) networks make access conditional upon authorisation by the owner or owners of the network. An example of a permissioned network is Corda, a distributed ledger platform designed specifically for financial institutions to execute financial contracts in synchrony with their peers developed by the R3 Consortium. Private blockchains may be set up and run by a single entity or by a consortium. In the latter case, the consensus protocol generally requires the approval of a minimum number of nodes, each operated by a different member of the consortium, before a transaction can be entered into the chain. Furthermore, the permission to read the data must be distinguished from the permission to transact: a private blockchain may allow anyone to see the data, but only verified entities to transact.

The paper then examines antitrust issues that may arise in the development stage of blockchain projects, especially by joint ventures and consortia.

Over 40 consortia have been set up globally, most of which set up permissioned rather that public blockchains. These joint ventures among competitors have two aspects: (a) they are agreements to develop a new or improved product (R&D Agreements); (b) they may set certain standards for interoperability (Standardisation Agreements).

Regarding R&D agreements, they are only problematic under EU law if the parties are competitors and their market share is substantial. Such agreements may be subject to traditional competition analysis (e.g. regarding whether the consortia limits competition on innovation that might have arisen independently of the consortium, or regarding whether the affected market extends beyond the blockchain). This classic analysis is, however, not the end of the matter when it is applied to blockchain R&D projects. Competition between different blockchain applications or even different technologies is and remains possible, but network effects also mean that a given blockchain application would be capable of delivering substantial efficiency gains if it is used by a minimum critical number of players.

Consortia for the development of new blockchain applications may also have the purpose of reaching agreement on common technical standards. A blockchain is, necessarily, a shared ledger that could not operate without minimum technical specifications and consensus protocols. Such consortia therefore fall to be assessed also as standardisation agreements. Common standards, agreed to and applied by participants in a market, will generally be procompetitive because they produce significant positive economic effects, in particular by ensuring interoperability and compatibility of services. Standard setting can, however, also give rise to restrictive effects on competition in specific circumstances. Such effects may arise through three main channels: (i) collusion or exchange of commercially sensitive information between companies that set up the standard-setting consortia; (ii) the exclusion of alternative technologies and restrictions on innovation, which is why the adoption of blockchain applications should probably not take place on an exclusive basis unless there are very good reasons why exclusivity is justified; (iii) foreclosure of the market where the standard is implement by limiting companies’ access to the standard.

The paper then asks whether denial of access to a private blockchain can be anticompetitive and, if so, in what circumstances.

A successful blockchain may achieve dominance. If this is the case, then refusal by the owners of the blockchain to grant access to the blockchain to (potential) competitors may be problematic. This is, of course, particularly relevant for private blockchains, which are characterised by the owners being able to refuse to grant general access to others. If the access to a blockchain technology is indispensable to offer a service that competes with that of the blockchain owner, then its gatekeeper needs to consider whether the refusal to grant access to third parties complies with competition law. However, under EU law, the threshold for bringing refusal to supply cases is high.

Because a blockchain will necessarily involve a certain number of players who will have been given access to the blockchain, and there will therefore certainly be some competition in the provision of the services for which the blockchain is indispensable, refusal to supply will be a particularly difficult abuse to prove. In Europe, a more promising route to obtain access to a “dominant”, but not necessarily indispensable, blockchain is the prohibition on a dominant undertaking from applying dissimilar conditions to equivalent transactions with its trading partners, thereby placing them at a competitive disadvantage. The threshold for establishing an infringement is still reasonably high, but has been interpreted by the Commission and the EU Courts as requiring little more than discrimination in itself and a competitive relation between the discriminated undertaking and its competitors that have received more favourable treatment.

Lastly, this paper discusses whether blockchain can facilitate collusion or even cartel-like behaviour.

There is widespread concern that blockchains could facilitate collusion among participants in any given system. While it is true that new methods of information exchange can facilitate coordination between competitors, such concern may be overestimated. Blockchains in which there is no disclosure of individualised, customer-specific information on price, or other key terms of the commercial offer, should not be problematic. If the blockchain is used only to match and clear deals and authenticating customers’ information, in principle there is no competition concern.

On the other hand, if all the details of individual transactions are shared on the chain, including price and volumes traded and details of each and every deal, then, depending on the structure of the market, there may be competition risks. Nonetheless, the conduct should be analysed under a rule of reason, in the USA, or effect test, in the EU, rather than under a per se rule, in the USA, or an object test, in the EU.

Of course, a blockchain, with its real-time recording of transactions, may be used to monitor or facilitate an underlying cartel agreement. It is even been suggested that blockchains, through the use of smart contracts, may be used to monitor market behaviour and, in particular, flag any deviation from the agreed conduct by colluding parties (potentially specifying automated punishments for such deviations). Blockchain could thus be an electronic means of setting up a cartel. Blockchain, as any other technology, can be used for illegal purposes, but this is not a reason to apply any stricter antitrust rules to blockchain applications. Standard competition analysis will suffice here.

Comment:

This is a very clear assessment of how various blockchain applications might fare under EU competition law. It provides a detailed overview of how the EU competition framework may apply to various applications of blockchain technology, and does so in absolutely orthodox terms. This is a clear virtue of this paper, but I hope that the author also attempts to address the challenges that may stretch and require us to develop new competition approaches in future work.